What really determines the price of milk

January 2, 2014

The Farm Bill has had a lot of media attention lately. I have had several people ask me how the price of milk going to be affected if the Farm Bill is not passed. There is not an easy or quick answer to that, so I thought I would share with you today some basics of marketing milk.

It's just the basics of supply and demand, right? No. There are several things that factor in as well. Milk has unique characteristics that create challenges in marketing. Milk is highly perishable. Cows produce milk every day. Dairy farms usually produce more milk in the spring than in the fall. Demand for milk is usually greater in the fall than in the spring. Milk is used to produce both high-valued products like fluid milk and lower-valued products like cheese and yogurt. And processors usually make either high-value or low-value dairy products, not both. All this combined could create chaos in the marketing of dairy products.

To provide some order and consistency to the marketplace, the Federal Milk Marketing Order System was authorized by Congress in 1937. It was implemented after dairy producers voted in favor of the system. FMMO requires buyers / processors of milk to pay minimum monthly prices to dairy producers. These minimum prices help to achieve price stability, have orderly marketing, and ensure that there are sufficient quantities of Class I fluid milk.

The United States is divided into 10 Federal Orders plus California. Ohio dairy producers are part of Federal Order 33. A milk market administrator manages each Federal Order. Even though the federal government created the FMMO system, it is not funded by tax dollars. Dairy producers and processors each pay a portion to fund this program.

One of the jobs of the market administrator is to collect money from the processors who produce high-value products. These dollars are "pooled" across the order and given to the processors who make lower-value products so that all dairy farmers can receive a uniform price for their milk. Without this pooling process, dairy farmers who had the opportunity to sell their milk to fluid milk processors could receive a very high price for their milk, while dairy farmers who had to sell their milk to a cheese plant would receive a much lower price.

In Federal Order 33, milk prices are based on components in the milk - fat, protein, and other solids. Pricing milk this way rewards producers for producing milk that is higher in these components. Milk with higher components will have a higher yield of products, such as cheese and ice cream, when processed. The value of these components is constantly changing due to supply and demand of the consumers.

Another piece of the milk price is the Producer Price Differential. The PPD represents the added value over the component prices for milk that is processed for fluid use in the FMMO. The greater the percentage of total milk produced in an FMMO that is used for fluid consumption, the greater the producer price differential. Historically, Ohio dairy producers have received a higher PPD than other producers in areas like Wisconsin and California, where a higher percentage of milk is processed into butter and cheese.

The market administrator also sets minimum price adjustments for milk quality. Producers will be penalized if they do not produce quality milk. All dairy products that reach consumers are quality products. "Milk is the most highly tested and regulated of any food product in the U.S.," says Charles Lausin, a lifelong Ohio dairy farmer (and also my dad).

Dairy farmers have to be great businessmen and women. The FMMO sets the minimum prices paid to producers, but processors may choose to pay more if they wish. Producers may choose to sell their milk directly to a processor or to pool their milk with that of other producers through membership in a milk-marketing cooperative.

I have only scratched the surface of what all goes into the price a dairy farmer receives for the milk his / her cows produce. I hope it has given you a general idea though. My husband and I come from multigeneration family dairy farms. Our families know many others operating family dairy farms. When milk prices are high, they are thankful to be able to cover production costs and save a little. When prices are low, these farmers are still going to produce quality milk and hope for better days.

Mary Smallsreed is a member of Trumbull County Farm Bureau and grew up on a family dairy farm in northeast Ohio.